HCA’s Declining Surgery Rates May Show Slowdown in U.S. Hospital Industry

By Tom Randall -
Jul 26, 2011

HCA Holdings Inc.’s report of a
drop in expensive surgeries may signal a broad slowdown for
hospitals because of rising unemployment and tepid consumer
spending.

Patients at HCA, the biggest U.S. hospital chain, sought
less-expensive procedures during the quarter, according to the
company. Per-patient income from Medicare, the government plan
for the elderly, also fell. Until more hospitals report earnings,
the possibility of a wider decline in spending will weigh on the
industry, said Arthur Henderson, an analyst at Jefferies & Co.
in Nashville, Tennessee, where HCA is based.

“What I’m particularly worried about is that this could be
another systemic issue related to the economy that could spell
trouble going forward,” Henderson said in a telephone interview.
HCA “can fix a company-specific issue, but they’re going to
have a lot tougher time fixing a macro systemic issue.”

It’s not clear whether the economy was responsible for the
shift in procedures among Medicare patients or whether HCA lost
customers to competitors, Henderson said. Investors will be
watching Health Management Associates Inc. (HMA)’s report on July 27
and Dallas-based Tenet Healthcare Corp. (THC)’s on Aug. 2 to see if
they have similar results. Positive reports could lift all
hospital stocks, Henderson said.

Shares Decline

HCA dropped 87 cents, or 3.1 percent, to $27.10 at 10:03
a.m. in New York Stock Exchange composite trading. Yesterday it
fell
19 percent to $27.97, the biggest decline since its March
initial public offering, after reporting second-quarter profit
and sales that missed analysts’ estimates.

At HCA, Medicare patients make up about 42 percent of
customers, the highest rate among publicly traded acute-care
hospitals, according to data compiled by Bloomberg Industries.
The company also has the slowest revenue growth per admission,
adding to the impact from fewer high-cost surgeries.

Managing Expenses

“We didn’t like the quarter, clearly,” said Richard Bracken, chairman and chief executive officer at HCA, in a
conference call with analysts. “We are looking to continue to
manage expenses appropriately.”

Lower costs of services would be good news for managed care
companies, according to David Windley, an analyst at Jefferies &
Co. UnitedHealth Group Inc. and WellPoint Inc. are the largest
U.S. health insurers.

“HCA missed their numbers, but that’s good news for
managed care companies, who will be more profitable as
utilization of medical services fall,” Windley said in a
telephone interview.

HCA reported second-quarter profit, excluding $75 million
to pay off debt, of 51 cents a share, 9 cents less than the
average estimate of 23 analysts surveyed by Bloomberg. Revenue
climbed 4 percent to $8.06 billion, also missing estimates.

Admissions of uninsured patients increased 11 percent in
the second quarter from a year earlier and accounted for 7.4
percent of same-facility admissions, the company said.

HCA operated 164 hospitals and 111 freestanding surgery
centers as of June 30.

A group including KKR & Co., Bain Capital LLC and Bank of
America Corp. invested about $5 billion in private equity in
2006 to acquire HCA in a $33 billion takeover. Including debt,
the transaction was the largest leveraged buyout at that time.